IRS Provides tax inflation adjustments for tax year 2023

 R-2022-182, October 18, 2022

WASHINGTON — The Internal Revenue Service today announced the tax year 2023 annual inflation adjustments for more than 60 tax provisions, including the tax rate schedules and other tax changes. Revenue Procedure 2022-38PDF provides details about these annual adjustments.

New for 2023

The Inflation Reduction Act extended certain energy related tax breaks and indexed for inflation the energy efficient commercial buildings deduction beginning with tax year 2023. For tax year 2023, the applicable dollar value used to determine the maximum allowance of the deduction is $0.54 increased (but not above $1.07) by $0.02 for each percentage point by which the total annual energy and power costs for the building are certified to be reduced by a percentage greater than 25 percent. The applicable dollar value used to determine the increased deduction amount for certain property is $2.68 increased (but not above $5.36) by $0.11 for each percentage point by which the total annual energy and power costs for the building are certified to be reduced by a percentage greater than 25 percent.

Highlights of changes in Revenue Procedure 2022-38

The tax year 2023 adjustments described below generally apply to tax returns filed in 2024.

The tax items for tax year 2023 of greatest interest to most taxpayers include the following dollar amounts:

• The standard deduction for married couples filing jointly for tax year 2023 rises to $27,700 up $1,800 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction rises to $13,850 for 2023, up $900, and for heads of households, the standard deduction will be $20,800 for tax year 2023, up $1,400 from the amount for tax year 2022.
   
• Marginal Rates: For tax year 2023, the top tax rate remains 37% for individual single taxpayers with incomes greater than $578,125 ($693,750 for married couples filing jointly).
  
  The other rates are:
   
  • 35% for incomes over $231,250 ($462,500 for married couples filing jointly);
  • 32% for incomes over $182,100 ($364,200 for married couples filing jointly);
  • 24% for incomes over $95,375 ($190,750 for married couples filing jointly);
  • 22% for incomes over $44,725 ($89,450 for married couples filing jointly);
  • 12% for incomes over $11,000 ($22,000 for married couples filing jointly).
     

  The lowest rate is 10% for incomes of single individuals with incomes of $11,000 or less ($22,000 for married couples filing jointly).
   

• The Alternative Minimum Tax exemption amount for tax year 2023 is $81,300 and begins to phase out at $578,150 ($126,500 for married couples filing jointly for whom the exemption begins to phase out at $1,156,300). The 2022 exemption amount was $75,900 and began to phase out at $539,900 ($118,100 for married couples filing jointly for whom the exemption began to phase out at $1,079,800).
   
• The tax year 2023 maximum Earned Income Tax Credit amount is $7,430 for qualifying taxpayers who have three or more qualifying children, up from $6,935 for tax year 2022. The revenue procedure contains a table providing maximum EITC amount for other categories, income thresholds and phase-outs.
   
• For tax year 2023, the monthly limitation for the qualified transportation fringe benefit and the monthly limitation for qualified parking increases to $300, up $20 from the limit for 2022.
   
• For the taxable years beginning in 2023, the dollar limitation for employee salary reductions for contributions to health flexible spending arrangements increases to $3,050. For cafeteria plans that permit the carryover of unused amounts, the maximum carryover amount is $610, an increase of $40 from taxable years beginning in 2022.
   
• For tax year 2023, participants who have self-only coverage in a Medical Savings Account, the plan must have an annual deductible that is not less than $2,650, up $200 from tax year 2022; but not more than $3,950, an increase of $250 from tax year 2022. For self-only coverage, the maximum out-of-pocket expense amount is $5,300, up $350 from 2022. For tax year 2023, for family coverage, the annual deductible is not less than $5,300, up from $4,950 for 2022; however, the deductible cannot be more than $7,900, up $500 from the limit for tax year 2022. For family coverage, the out-of-pocket expense limit is $9,650 for tax year 2023, an increase of $600 from tax year 2022.
   
• For tax year 2023, the foreign earned income exclusion is $120,000 up from $112,000 for tax year 2022.
   
• Estates of decedents who die during 2023 have a basic exclusion amount of $12,920,000, up from a total of $12,060,000 for estates of decedents who died in 2022.
   
• The annual exclusion for gifts increases to $17,000 for calendar year 2023, up from $16,000 for calendar year 2022.
   
• The maximum credit allowed for adoptions for tax year 2023 is the amount of qualified adoption expenses up to $15,950, up from $14,890 for 2022

Items unaffected by indexing

By statute, certain items that were indexed for inflation in the past are currently not adjusted.

• The personal exemption for tax year 2023 remains at 0, as it was for 2022, this elimination of the personal exemption was a provision in the Tax Cuts and Jobs Act.
   
• For 2023, as in 2022, 2021, 2020, 2019 and 2018, there is no limitation on itemized deductions, as that limitation was eliminated by the Tax Cuts and Jobs Act.
   
• The modified adjusted gross income amount used by joint filers to determine the reduction in the Lifetime Learning Credit provided in § 25A(d)(2) is not adjusted for inflation for taxable years beginning after December 31, 2020. The Lifetime Learning Credit is phased out for taxpayers with modified adjusted gross income in excess of $80,000 ($160,000 for joint returns).

Tax rates and standard deductions 2022

 

Federal Tax Rates and Brackets

There are seven federal tax brackets for tax year 2022, the same as for 2021. As noted above, the top tax bracket remains at 37%. The other six tax brackets set by the IRS are 10%, 12%, 22%, 24%, 32%, and 35%. This means that the highest earners fall into the 37% range, while those who earn the least are in the 10% bracket.1

The tax rates and brackets for 2022 are provided in the following chart.3

2022 Tax Brackets
Rate	Married Filing Jointly	Single Individual	Head of Household	Married Filing Separately
10%	$20,550 or less	$10,275 or less	$14,650 or less	$10,275 or less
12%	Over $20,550	Over $10,275	Over $14,650	Over $10,275
22%	Over $83,550	Over $41,775	Over $55,900	Over $41,775
24%	Over $178,150	Over $89,075	Over $89,050	Over $ 89,075
32%	Over $340,100	Over $170,050	Over $170,050	Over $170,050
35%	Over $431,900	Over $215,950	Over $215,950	Over $215,950
37%	Over $647,850	Over $539,900	Over $539,900	Over $323,925

There is no longer a personal exemption due to the 2017 Tax Cuts and Jobs Act.4 Taxpayers whose net investment income exceeds the IRS limit ($200,000 for an individual taxpayer, $250,000 married filing jointly, or $125,000 married filing separately) are subject to a 3.8% net investment income tax (NIIT) on investment income above those limits.

2022 Standard Deductions

The deduction set by the IRS for 2022 is as follows:

• $12,950 for single filers
  
• $12,950 for married couples filing separately
• $19,400 for heads of households
• $25,900 for married couples filing jointly
• $25,900 for surviving spouses
  

The additional standard deduction amount for an individual who is aged or blind is set at $1,400. That amount increases to $1,750 for individuals who are unmarried and if they aren’t surviving spouses. The standard deduction for claiming a dependent is $1,150 or $400 plus the individual’s earned income (as long as it’s not over $12,950)—whichever is greater.

Capital Gains

Capital gains rates are lower than a taxpayer’s ordinary income rate. But they depend on the taxpayer’s taxable income and filing status.7 The maximum adjusted capital gains rates apply for both the regular income tax and the alternative minimum tax.

Your capital gains rate is 0% for the 2022 tax year provided your income does not exceed:

• $83,350 for married couples filing jointly
• $41,675 for married couples filing separately
• $55,800 for the head of a household
• $41,675 for single filers8

In 2022, the 15% rate applies to adjusted net capital gains for:

• Joint returns of up to $517,200
• Married individuals’ separate returns of up to $258,600
• Head of household returns of up to $488,500
• Single individual returns of up to $459,7509
  

The applicable capital gains rate is set at 20% for any income amounts above these ceilings.

Individual Tax Credits

Earned Income Tax Credit (EITC)

The maximum amount of the earned income tax credit (EITC) for taxpayers whose self-reported incomes were in the lowest income bracket and the taxable income levels for its thresholds and ceilings are also adjusted for inflation. The maximum credit for three or more children is $6,935 in 2022. For married couples filing jointly, the phaseout of the credit begins at $26,260 of adjusted gross income (or earned income, if higher). The credit is completed at $59,187.

No EITC is allowed if the aggregate amount of investment income, such as from interest, dividends, net capital gains, or other passive activities, exceeds $10,300 in 2022.

Advanced Child Tax Credit (ACTC)

The expansion of the Child Tax Credit and the monthly advance payments only applied to 2021. There was an option to receive the credit as a lump sum by opting out on the IRS Child Tax Credit Update Portal, which is no longer available. (That money will come at one time when 2022 taxes are filed in the spring of 2023.) The child tax credit for tax years 2022 and onward will revert back to pre-2021 rules.

Qualified Adoption Expenses

The credit for qualified adoption expenses, as well as the special credit for the adoption of a child with special needs, amount to $14,890 for 2022. The exclusion from an employee’s income for qualified adoption expenses that are paid or reimbursed under an employer plan will be increased to the same level.

Lifetime Learning Credit

In 2022, the maximum $2,000 per return lifetime learning credit (LLC) for qualified educational expenses for a taxpayer, spouse, or dependent is phased out for taxpayers with MAGI in excess of $80,000 ($160,000 for joint returns).

Foreign Earned Income Exclusion

The foreign earned income exclusion is set by the IRS at $112,000 for 2022.

Alternative Minimum Tax

The alternative minimum tax (AMT) applies to alternative minimum taxable income, such as regular taxable income with certain tax benefits added back, in excess of an exemption level.

The alternative minimum tax exemption levels for 2022 are as follows:

• $118,100 for joint returns
• $75,900 for unmarried individuals
• $59,050 for married people’s separate returns
  

These alternative minimum tax exemption levels phase out, in 2022, from:

• $1,079,800 to $1,552,200 for joint returns
• $539,900 to $843,500 for unmarried individuals
• $539,900 to $776,100 for married people’s separate returns

The alternative minimum tax rate is 28% for alternative minimum taxable income up to a maximum of $206,100 (for 2022) for returns of married couples and single individuals ($103,050 in 2022, for married filing separately).

Increased Allowances: Fringe Benefits, Medical Spending Accounts, and Estates

The monthly limit for qualified transportation and qualified parking fringe benefits is set at $280 for 2022.

The maximum salary reduction for contributions to health flexible spending accounts (FSAs) is $2,850 for 2022. The maximum carryover of unused amounts for cafeteria plans is $570 for 2022.

The thresholds and ceilings for participants in medical savings accounts (MSAs) are from:

• $2,450 to $3,700 with a maximum out-of-pocket expense of $4,950 for self-coverage for 2022
• $4,950 to $7,400 with a maximum out-of-pocket expense of $9,050 for family coverage for 2022
  

For a decedent dying in 2021, the exemption level for the estate tax is set at $12.06 million in 2022. The annual gift tax exclusion is $16,000 for 2022.

Retirement Plans

The IRS also sets limitations on retirement plan contributions and phaseout ranges. The income exclusion for employee contributions to employer retirement plans, such as 401(k)s, 403(b)s, 457 plans, and the federal government’s Thrift Savings Plan, are set at $19,500 for 2021 and $20,500 for 2022. The catch-up contribution for employees ages 50 and older is $6,500 for both years. The limitation for SIMPLE (Savings Incentive Match Plan for Employees) retirement accounts is set at $13,500 for 2021 and $14,000 for 2022.

Individual Retirement Accounts (IRAs)

The deductible amount for individual retirement account (IRA) contributions is set at $6,000 for both 2021 and 2022. People ages 50 and older can contribute an additional $1,000 each year.

The phaseout levels for the deduction, though, are adjusted upward. If either a taxpayer or their spouse is covered by a workplace retirement plan during the year, the deduction may be reduced or phased out until it is eliminated. 

The phaseout ranges for 2021 are as follows:

• If an individual is an active participant in an employer retirement plan, the deduction phaseout for adjusted gross incomes is $66,000–$76,000 for single individuals and heads of households, and $105,000–$125,000 for joint returns.
• For an IRA contributor who is not an active participant in another plan but whose spouse is an active contributor, the phaseout ranges from $198,000 to $208,000.
• For a married active contributor filing a separate return, there is no adjustment and the phaseout range will remain $0 to $10,000.
  

The phaseout ranges for 2022 are as follows:

• If an individual is an active participant in an employer retirement plan, the deduction phaseout for adjusted gross incomes is $68,000–$78,000 for single individuals and heads of households, and $109,000–$129,000 for joint returns.
• For an IRA contributor who is not an active participant in another plan but whose spouse is an active contributor, the phaseout ranges from $204,000 to $214,000.
• For a married active contributor filing a separate return, there is no adjustment and the phaseout range will remain $0 to $10,000.
  

IRA phaseouts do not apply if neither a taxpayer nor their spouse is covered by a workplace retirement plan.

Roth IRAs

For 2022, the phaseout ranges for Roth IRA contributions are $129,000 to $144,000 for single taxpayers and heads of households and $204,000 to $214,000 for joint returns. The Roth IRA phaseout for a married individual’s separate return remains at $0 to $10,000.

Saver’s Credit

Low-income taxpayers who make contributions to 401(k), 403(b), SIMPLE, SEP (Simplified Employee Pension), or certain 457 plans, as well as traditional and Roth IRAs, are entitled to claim a nonrefundable tax credit in addition to their exclusions or deductions.

Married taxpayers filing joint returns are eligible to claim a credit for contributions of up to $4,000 at a rate for 2022 of:

• 50% with AGI up to $41,000
• 20% with AGI up to $44,000
• 10% with AGI up to $68,000

Heads of households can claim, in 2022, a credit for up to $2,000 of contributions at a rate of:

• 50% with AGI up to $30,750
• 20% with AGI up to $33,000
• 10% with AGI up to $51,000

All other taxpayers are eligible to claim, for 2022, a credit for up to $2,000 of contributions at a rate of:

• 50% with AGI up to $20,500
• 20% with AGI up to $22,000
• 10% with AGI up to $34,000
  

IRS Letters 6419 ACTC and 6475 EIP#3

 Early in 2021 Congress passed the American Rescue Plan which included a provision that increased the child tax credit amount and upped the age limit of eligible children. Normally, the credit was $2,000 per eligible child under age 17. For the 2021 tax year the American Rescue Plan increased the credit to $3,000 for each child under age 18 and to $3,600 for children under age 6 at the end of the year.

Even though the benefit of a tax credit traditionally isn’t available until after the tax return for the year has been filed, for 2021 the new tax law included a provision to get the credit benefit into the hands of taxpayers as quickly as possible and charged the Secretary of the Treasury with establishing an advance payment plan. Under this mandate, those qualifying for the credit would receive monthly payments starting in July equal to 1⁄12 of the amount the IRS estimated the taxpayer would be entitled to by using the information on the 2020 return. If the 2020 return had not been filed or processed yet by the IRS, the 2019 information was to be used.

However, since the IRS only estimated the amount of the advance payments, some taxpayers may have received too much and others not enough. Thus, the payments received must be reconciled on the 2021 tax return with the amount that each taxpayer is actually entitled to. Those who received too much may be required to repay some portion of the advance credit while some may be entitled to an additional amount.

To provide taxpayers with the information needed to reconcile the payments, the IRS has begun sending out Letter 6419, an end-of-year statement that outlines the payments received as well as the number of qualifying children used by the IRS to determine the advance payments. For those who filed jointly on their prior year return, each spouse will receive a Letter 6419 showing the advance amount received.

Do not discard the letter(s) from the IRS as they will be required to properly file 2021 returns.

Having received the advance credit payment, taxpayers will find their refunds will be substantially less than they may have expected, or they might even end up owing money on their tax return unless their AGI is low enough to qualify for the safe harbor repayment protection for lower-income taxpayers, in which case the excess advance repayment is eliminated or reduced.

Example: If a taxpayer received advance child tax credit payments for two children based on the 2020 return, and the taxpayer doesn’t claim both children as dependents in 2021, the taxpayer would need to repay the excess on their return, unless they are protected by the safe harbor provision.

It is also possible that one taxpayer could have received the advance child tax credit payments based on their 2020 return and not have to make a repayment under the safe harbor rule, while another taxpayer, who can legitimately claim the child, can get the credit on their 2021 tax return. This is most likely to happen when the parents are divorced. So, there’s the potential for the child tax credit to be received by both parents.

Economic Impact Payment (EIP) Letter - The IRS will begin issuing Letter 6475, regarding the third Economic Impact Payment, to EIP recipients in late January. This letter will EIP recipients determine if they are entitled to and should claim the Recovery Rebate Credit on their tax year 2021 tax returns filed in 2022.

Letter 6475 only applies to the third round of Economic Impact Payments that were issued starting in March 2021 and continued through December 2021. The third round of EIPs, including the “plus-up” payments, were advance payments of the 2021 Recovery Rebate Credit that would be claimed on a 2021 tax return. Plus-up payments were additional payments the IRS sent to people who received a third EIP based on a 2019 tax return or information received from the Social Security Administration, Railroad Retirement Board or Dept. of Veterans Affairs; or to people who may be eligible for a larger amount based on their 2020 tax return.

Most eligible people already received the payments. However, those who are missing stimulus payments should review the information to determine their eligibility and whether they need to claim a Recovery Rebate Credit for tax year 2020 or 2021.

Like the advance CTC letter, the EIP letter includes important information that can help tax preparers quickly and accurately reconcile the Recovery Rebate Credit when preparing 2021 tax returns.

Please contact our office if you have questions regarding the Child Tax Credit or the Recovery Rebate Credit and the advance payments of either that you received.